Ring out the bells, and kill the fatted calf! UK Inflation has after 4+ long years actually attained its target rate of 2%. Wild celebrations took place at the Bank yesterday, as some of the economists there actually drank tea from cups that were rumoured to be less than squeaky clean …..those crazy guys!!
I guess it was inevitable that with the news heavily focussed on the target being reached, a lot of headline writers/talking heads were forced to say something about the event. Most of it was pure bluster with commentators saying that this bought Mark Carney more time before he had to raise rates etc. The fact is of course that this number raised very little interest at the Bank, it was expected – and short term it is expected to fall another couple of notches (maybe with the exception of the January numbers). No change to any plan/intention/guidance came about yesterday as a result of this target being reached, but nevertheless it is good news.
Barring a couple of `double Donalds` cropping up in the next few months things are broadly going along quite nicely at the Bank. The rogue statistic is the frothy house price index, and expect some action around the peripheries to try and cool this in the near future. The traditional bugbear for the Bank has been the value of sterling, but even this has been a non issue now for a long time. There was a passing reference in the MPC December minutes saying that a stronger pound would serve to inhibit the recovery because of its negative effect on export markets, but equally, it is an important anti inflation suppressant. In this era of competitive devaluation by the by, it is quite nice to see that one of the best performing countries in the world (growth wise) has also one of the best performing currencies in the world!
There is however an issue of concern associated with the exchange rate in the wider economy. The UK balance of trade numbers are a problem now, and unless rebalancing in the economy takes place (a gradual process admittedly) will be a greater problem in the future. True, the appreciation of sterling hasn`t helped exporters, but greater factors are the behaviour of the consumer and the turgid nature of recovery in our traditional export markets. As I have mentioned in the past, the recovery in the UK can only last so long on the back of continued consumer demand – the sector is increasingly indebted and is still suffering negative real wage growth – and business spending to replace it needs confidence back and red tape removed. The UK current account deficit is currently at or around 5% of GDP, the widest in these terms since the late 80`s and it reflects these underlying issues.
There are warning signals aplenty then, and it was interesting to hear GOTCHA (George Osborne The CHAncellor) this morning urging European leaders to `reform or decline`. He is clearly frustrated with the lack of flexibility in the Eurozone – almost as frustrated as they are with the UK`s continued `sniping` from the side! A good (quick please!) recovery in Europe is just about the biggest piece of good news that the UK needs now to enable the current favourable economic situation to be more firmly based. Possibly more hope than expectation then!
